Ag economist: 2013 a transition year for grain farmers

WEST LAFAYETTE, Ind. - Changes in the economics of grain production after drought led to record-high farm incomes in 2012 could mean a shift in the demand for and prices of agricultural inputs for the 2014 crop, a Purdue Extension agricultural economist says.

The 2012 drought-ravaged crop left short supplies and high demand, with farmers receiving high prices for the grain they were able to produce and high insurance indemnities on covered crops that were destroyed. High grain-farm incomes capped a series of years with abnormally high grain prices. But with some drought relief in major corn- and soybean-production states leading to expected higher yields and lower commodity prices, grain farmers can expect to see changes in what they pay for inputs, such as seed, fertilizers, fuels and chemicals, for the 2014 crop.

An apparent shift in market demand for corn and soybeans also could play a major role in what it will cost growers to produce the next crop, Alan Miller said.

"The markets are currently saying they want more soybeans and less corn in 2014, which changes the demand for inputs," he said. "For example, growers don't need as much nitrogen fertilizer if they are growing less corn. That ultimately will affect the prices of inputs."

The big story in 2014 crop production costs, Miller said, is fertilizer prices. Potash and phosphate prices have been declining since the fall of 2012 and are down 15-17 percent since last spring. Nitrogen prices peaked last spring and have dropped about 22 percent this fall. Farmers' ability to apply fertilizer this fall will help determine what prices will look like for next spring.

"If weather or a late harvest were to keep farmers from applying fertilizers this fall, it could drive fertilizer prices down for the spring," he said. "Normally, fertilizer prices hit bottom in the early fall, but we will have to wait and see is if the market is weak enough to sustain the drop into the spring."

Nitrogen prices also are falling because the U.S. is now a low-cost producer. North American fertilizer producers are expecting historically strong sales this fall.

During the height of the ethanol boom, farmers were growing more corn and using more nitrogen. Plus, natural gas prices were high. Since then, natural gas prices have fallen, which has led to renewed interest in investing in domestic production capacity for nitrogen fertilizers. This leads to greater supplies of U.S.-produced nitrogen in the future if the cost of producing it here stays well below its market price as it is now.

"Corn growers really will start to see the full effect of more domestically produced nitrogen in 2015," Miller said. "We have been importing more than 50 percent of our nitrogen fertilizer, meaning supply disruptions could easily impact prices. As we produce more of our own, we will import less. The bigger supply will benefit corn producers."

Recent prices for nitrogen in anhydrous ammonia form have hovered around $700 per ton. According to Miller, that could possibly eventually fall to as low as $400 or $500 per ton if U.S. production capacity increases considerably.

One area where farmers won't see price relief is seed costs. By Miller's estimates, some seed could be up by 2-3 percent or more for the 2014 planting season.

"Seed is not the place where growers will cut corners to try to save money," he said. "They will be careful in pricing inputs, but they want the technology to produce the best crop possible."

The prices of chemicals, such as herbicides, pesticides and fungicides, are likely to be a mixed bag. For the most part, chemical prices will be up slightly - about 1 percent, according to Miller. The exception is herbicide, where prices will remain flat.

Prices for fuels commonly used on the farm currently are expected to be down in 2014. The costs for both diesel, which powers most farm machinery, and propane, which farmers use to power grain dryers, could be down by about 4 percent.

Fuel prices, however, can be among the most volatile costs farmers encounter each year because much of it is imported. While an increase in domestic energy production has helped thwart major supply disruptions, Miller said tensions abroad could affect what farmers pay for fuel in the U.S.

"We have to be a concerned because of the unrest in the Middle East," he said. "It could quickly change the fuel-price outlook."

Farmers who have wanted to purchase new tractors, combines, implements or other machinery have encountered increasing prices. Machinery prices increased by an average of 7.4 percent per year from 2002 to 2012 because record-high farm incomes increased demand. The sustained increases in machinery prices could quickly come to a halt, especially for used farm equipment, if commodity prices decline and stay down for an extended period of time, Miller said.

As producers make their decisions about inputs for the 2014 crop year, Miller said the bottom line is that they should keep an eye on the economics of each decision. For fertilizer, that means waiting to see if prices continue to decline, while it also means going ahead and spending the money now for seed that best fits individual production systems.

For chemicals, Miller said it means determining whether the benefits outweigh the costs.

"Farmers always need to look for ways to be more efficient by looking for ways to drive down the cost per unit of output," he said. "They also need to be cautious with capital investments, such as equipment and land purchases and rents."